Second-quarter U.S. productivity falls 0.3%

Employees work more hours to push labor costs higher, data show

WASHINGTON (MarketWatch) — The productivity of U.S. businesses fell in the second quarter as labor costs accelerated, the government said Tuesday, while revised first-quarter figures were slashed to show a decline.

Second-quarter productivity fell by a 0.3% annual rate on a seasonally adjusted basis, according to the Labor Department. Economists surveyed by MarketWatch expected productivity to decline by 0.9%.

What’s more, productivity in the first quarter was revised lower to a 0.6% decline instead of a 1.8% increase.

The economy hasn’t experienced two straight drops in productivity since the second half of 2008. Over the past 12 months productivity has risen at a meager 0.8% pace.

The government also revised productivity for the prior three years, showing a slightly higher increase in 2010 and sharply lower gains in 2009 and 2008.

The rising cost of labor has been the key driver of declining productivity. The unit cost of labor rose 2.2% on top of a 4.8% surge in the first quarter. The first-quarter increase was initially put at 0.7%.

Unit-labor costs reflect how much it costs a business to produce one unit of output, such as a ton of steel or one hour of legal advice. Over the past 12 months unit-labor costs are 1.3% higher, though that number is expected to climb in the second half of 2011.

Productivity fell in the three months through June because the number of hours that employees worked rose faster than the amount of goods and services generated.

The quantity of goods and services produced, known as real output, grew at an annual rate of 1.8% in the second quarter. Hours worked rose 2.0%, however.

In the manufacturing sector — the strongest segment of the U.S. economy over the past two years — the difference was even greater. Output edged up 0.6% while hours worked jumped 2.6%

The lower increase in output might suggest that businesses did not find as much demand for their products as they expected, a miscalculation that could be costly if they hired more workers in anticipation of stronger sales.

Alternatively, some companies might have found it difficult to meet demand with their current personnel, forcing them to pay more overtime or add more workers.

The constant revisions to productivity data, however, makes it hard to draw firm conclusions, some economists say. The huge reversal in first-quarter data, for example, shows how hard it is for the government to calculate productivity, especially in service-sector businesses such as retail or health care. The U.S. is now a services-dominated economy.

“Productivity numbers get revised many times over several years before they get etched in stone,” said Patrick Newport, U.S. economist at IHS Global Insight.

Still, the drop in productivity is unwelcome news at a time when the economy is slowing and financial markets are jittery. Any bad news only fuels concerns of another U.S. recession.

“The fall in US nonfarm productivity and rise in unit labor costs in the second quarter does not bode well for either corporate profits or the jobs outlook,” said Paul Dales, senior U.S. economist at Capital Economics.

Faster productivity is generally viewed as the key to a rising standard of living because it leads to higher pay for workers and larger profits for companies. Economies that do not generate higher productivity tend to be weaker: businesses earn smaller profits, hire fewer workers and pay lower wages.

Short-term declines are not always a bad thing, though. Sometimes it’s a signal that businesses need to hire more workers to keep up with rising demand, a good thing in an economy with high unemployment.

The rise in labor costs, however, doesn’t mean workers are better off. Although compensation per hour rose 1.9% at an annual rate, hourly wages adjusted for inflation actually fell 2.1%. The decline reflects the higher cost of living tied to increases in the price of necessities such as gasoline and food.

In its annual revisions, meanwhile, the Labor Department raised productivity for 2010 to show an increase of 4.1% instead of a previously reported 3.9%.

For 2009, productivity was revised down to a gain of 2.3%, down from 3.7% previously, and for 2008, it was lowered to a 0.6% increase from 1.0%.

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